Last week got off to a quiet start as the markets waited for Federal Reserve Chairman Alan Greenspan's semiannual testimony to Congress on monetary policy. Buyers - real money, overseas and fast money - emerged Wednesday, however, as the Treasury market sold off on his comments which contained nothing that would suggest a change in the Fed's current course of action. Greenspan's statement - that the decline in longer-term rates as the FOMC began its measured rate hikes was a "conundrum" - affected the long end. The 10-year Treasury yield backed up to the middle of its trading range by Wednesday evening, which took the pressure off refinancing and convexity risks.
With the 10-year Treasury yield back to the middle of its range, it would appear mortgages are back to their steady grind tighter mode as the sector benefits from low volatility, limited supply, good demand, and limited opportunities in competing sectors. Mortgages are expected to continue to hold firm if rates hold steady or increase modestly. Any moves towards 4% Treasury yield will likely be met with profit-taking and sidelined investors on fears of increased volatility, higher supply, refi and convexity risks.